Chapter 18 Economic Policy Pearson Education, Inc. © 2006 American Government 2006 Edition (to...

Chapter 18

Economic Policy

Pearson Education, Inc. © 2006

American Government2006 Edition(to accompany Comprehensive, Alternate, Texas, and Essentials Editions)

O’Connor and Sabato


The Roots of Government: Involvement in the Economy During the nation’s first century states bore

the responsibility of managing economic affair.

Nineteenth Century Government long role in economy 1. What were the main areas in which the

government influenced Economic Policy? Tax, tariff, public lands disposal, and public works

projects and the national bank But national regulatory programs were few and

restricted. State governments active in promoting and

regulating private economic activity.


The Nineteenth Century After Civil War, U.S. experienced rapid

economic growth. Large scale manufacturing enterprises New problems arose Business cycle: fluctuations between expansion

and recession that is a part of modern capitalist economics.

During recessions people lose their jobs and income, and the economy experiences a low or even negative growth rate.


The Nineteenth Century 2. What is Laissez-faire economics?

A French term literally meaning “to allow to do, to leave alone.” It is a hands-off governmental policy that is based on the belief that governmental involvement in the economy is wrong.

Major reform A. Interstate Commerce Act 1887 B. Sherman Antitrust Act 1890 Establishment of the Department of Agriculture

(1862) C. Homestead Act D. Morrill Land Grant Act


The Great Depression and the New Deal During 1920s, conservative administrations

reduced the role of the government in restricting private business activities.

3. What were the conditions during the Great Depression?

Prices dropped, production declined, unemployment rose Few believed there was much for the government

to do. Franklin D. Roosevelt called for a “New Deal” 4. What is an Interventionist State: Alternative

to the laissez-faire state, the government takes an active role in guiding and managing the private economy.

MONETARISM

Supply side economics Developed by Milton Friedman Inflation occurs due to too much

money chasing too few goods. Economy needs steady increase in

money supply equal to economic growth.


Keynesianism

Demand Side economics John Maynard Keynes Economy’s health depends on savings

and spending by consumers Activist government If Demand decreases causes increase in

government spending If Demand increases causes increase in

taxesPearson Education, Inc. © 2006

Planning

Wage controls Price controls John Kenneth Galbraith Wage / Price Spiral

If Price increases then wages increase causing Price to increase yielding inflation.

Requires extreme government regulation of the market


Supply-side

Arthur Laffer and Paul Craig Roberts More planning with less government

interference 1. Cutting taxes to increase incentive to

save and invest 2. Investment = increase in jobs 3. Increase in Jobs = Increase in taxes at

the lower rates 4. Less cheating on tax returns


Reganomics

Combination of monetarism / supply-side / domestic budget cutting

Reagan’s economic advisors 1. Reduce size of government 2. Stimulate growth 3. Increase military strength

Created large government deficits


Effects of Reaganomics

1. Only slowed growth of domestic spending

2. increased military 3. controlled money supply 4. cut taxes 5. increased Social Security 6. decreased unemployment 7. increased business activityPearson Education, Inc. © 2006


Financial Reforms Bank holiday

Only financially sound banks were permitted to reopen. New banking laws

A. Glass-Steagall Act (1933) Required the separation of commercial and investment banking

and set up of the FDIC B. Securities Act (1933)

Required that prospective investors be given full and accurate information about the stocks or securities being offered to them.

C. Securities Exchange Act (1934) Created the Securities and Exchange Commission authorized to

regulate the stock exchange and to reduce the number of stocks bought on margin (on borrowed money).


Agriculture D. Agricultural Adjustment Act (1933)

Sought to boost farm income by restricting agricultural production in order to being it into better balance with demand.

Supreme Court found it unconstitutional. Constitution did not grant Congress the authority to regulate commerce in Article 1.

E. Replaced by the Soil Conservation and Domestic Allotment Act. Did not work well.

Congress passed a second AAA Provided subsidies to farmers to limit their crops. Protected farmers, but many thought it a wasteful

program. E. What is a subsidy?


Labor 5. National Labor Relations Act of 1935 (Wagner

Act) Guaranteed worker’s rights to organize and bargain

collectively through unions of their own choosing 6. National Labor Relations Board

Created to carry out the act and to conduct elections to determine which union, if any, employees wanted to represent them.

7. Fair Labor Standards Act (1938) Intended to protect the interests of low-paid workers,

the law set 25 cents per hour and 44 hours per week as initial minimum standards.


Growth in the Minimum Wage Over Time


Labor

Industry Regulations 8. Federal Communications Commission (1934)

Given extensive jurisdiction over the radio, telephone, and telegraph industries.

9. The Civil Aeronautics Board (1938) Put into place to regulate the commercial

aviation industry. 10. Motor Carrier Act (1935)

Put the trucking industry under the jurisdiction of the Interstate Commerce Commission.


The Social Regulation Era

Economic regulation Governmental regulation of business

practices, industry rates, routes, or areas serviced by particular industries.

Social regulation Governmental regulation of the quality

and safety of products as well as the conditions under which goods and services are produced.


The Social Regulation Era From the 1960s to the mid-1970s the

national government passed social regulatory legislation on such topics as: Consumer protection Health and safety Environmental protection

All based on commerce clause authority Set up new regulatory agencies to implement

the new regulations More industries affected by government.


Why the surge of social regulations? The late 1960s and early 1970s were a time of social

activism. The consumer and environmental movements were

at the peak of their influence. The public had become much more aware of the

dangers to health, safety, and the environment associated with various modern products.

Members of Congress saw the advocacy of social regulation as a way to gain visibility and national prominence.

The presidents in office during most of this period each gave support to the social regulation movement.


11. What is Deregulation A reduction in market controls. In theory, deregulation would increase market

competition and lead to lower prices for consumers. Ford administration made deregulation a major

objective. Conservative Republican

Senator Ted Kennedy held hearings on airline deregulation.

Priority of the Carter Administration as well. Agricultural regulation still controversial.

2002 Bush signed into law a six-year agricultural bill with a price tag of $100 billion.


Stabilizing the Economy Massive scale and persistence of the Great

Depression led to the 12. Employment Act of 1946

Committed the government to maintaining “maximum employment, production, and purchasing power”


Stabilizing the Economy Economic stability

A situation in which there is economic growth, rising national income, high unemployment, and steadiness in the general level of prices.

13. What is Inflation? A rise in the general prices levels of an economy.

14. What is a Recession? A short-term decline in the economy that occurs

as investment sags, production falls off, and unemployment increases.


Monetary Policy: Controlling the Money Supply 15. What is Monetary Policy?

A form of government regulation in which the nation’s money supply and interest rates are controlled.

Money A system of exchange for goods and services

that includes currency, coins and bank deposits. 16. What is the job of the Federal Reserve

Board? A seven-member board that sets member banks’

reserve requirements, controls the discount rate, and makes other economic decisions.


17. What are the five parts of the Federal Reserve System?


Monetary Policy: Controlling the Money Supply 18. What are the Reserve requirements?

Governmental requirements that a portion of member banks’ deposits must be retained to back loans made.

19. What is the Discount rate? The rate of interest at which member banks can

borrow money from their regional Federal Reserve Bank.

20. What is the purpose of Open Market Operations? The buying and selling of government securities by

the Federal Reserve Bank in the securities market.


The President and the FRB

President shares responsibility for fiscal policy with Congress

Congress authorizes the FRB to make monetary policy

But there are many formal and informal contacts between the White House and the FRB.


21. What is Fiscal Policy: Taxing and Spending Federal government policies on taxes, spending,

and debt management Intended to promote the nation’s macroeconomic

goals, particularly with respect to employment, price stability, and growth.

Revenue Act of 1964 Reduced personal and corporate income tax rates

Tax cuts to stimulate the economy Reagan in 1981 and G.W. Bush in 2001 and 2003


Sample Tax Savings Based on 2001 Rate Cuts


22. What are the Effects of Globalization?

International economy Increased competition benefits consumers Expands the market for American products Labor unions are strongest critics of free trade

Stress need to restrict “dumping” Fair trade rather than free trade

Analysis suggests that globalization further segments the market into winners and losers Losers tend to be smaller businesses and

workers


The Budgetary Process 23. How does the Federal government

raises money for expenditures? individual income taxes social insurance retirement receipts corporate income taxes make up less than 10

percent of receipts 24. Most government spending goes toward?

National defense Human resources


The Federal Budget Process


Congress and the Budgetary Process

25. What was the Budget and Accounting Act of 1921? Gave the president authority to prepare an annual

budget and submit it to Congress Staff agency now called the Office of Management

and Budget was created to assist the president in this process.

President sends budget proposal to Congress in January or February of each year.

Congress and the appropriations committees actually provide the funding needed to carry out programs. 26. What was the Budget and Impoundment Control

Act of 1974?


The Budget Deficit and the Debt 1980s government finance

Large annual budget deficits and rapidly growing national debt.

27. What were causes of budget deficits? Result of recession, large tax cuts, increased defense

spending, spending on entitlements

28. What is the difference between yearly deficits add to total national debt?

Deficits are justified in times of recession to get the economy going; however, they are criticized if they are viewed as “structural” or built into the economy even in times of prosperity.


TAXES


Entitlements and Discretionary Spending, 1963-2007


29. What actions are regulated by the Environmental Protection Agency?

Since the 1970s, Congress has enacted a large volume of pollution control legislation.

Brownfields Revitalization and Environmental Restoration Act of 2001

Clean Air Act Clean Water Act Safe Drinking Water Act

Toxic Substance Control Act Resource Conservation and

Recovery Act Comprehensive

Environmental Response, Compensation, and Liability Act

Federal Insecticide, Fungicide and Rodenticide Act

National Environmental Policy Act

Pollution Prevention ActEPA responsible for implementation


30. What is the Environmental Protection Agency

Nation’s largest regulatory agency Works with state agencies to enforce

environmental legislation. Three major eras of EPA’s political life

1970s: organizational growth 1980s: Reagan administration and hostility

toward EPA goals; budget cuts 1983 onward: increase in budget and staff; focus

on balance between environmental protection and economic costs

Chapter 18 Economic Policy Pearson Education, Inc. © 2006 American Government 2006 Edition (to...

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